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The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by jurisdiction, and the information on this blog may not apply to every reader. You should not take, or refrain from taking, any legal action based upon the information contained on this blog without first seeking professional counsel.

The defendant supplied electronic sensor components for plaintiff’s use in its high-tech sports performance products. Plaintiff sued when most of the parts were faulty and didn’t meet Plaintiff’s verbal and written requirements. Plaintiff brought both contract- and tort-based claims against the Plaintiff.

The Breach of Contract Claims

The Seventh Circuit affirmed the dismissal of the contract claims on the basis they were time-barred under the UCC’s four-year limitations period for the sale of goods.

In Illinois, a breach of written contract claimant has ten years to sue measured from when its claim accrues. 735 ILCS 5/13-206. A claim accrues when the breach occurs, regardless of the non-breaching party’s lack of knowledge of the breach. For a contract involving the sale of “goods,” a shortened 4-year limitations period applies. 810 ILCS 5/2-102 (goods df.), 810 ILCS 5/2-725(2)(4-year limitations period).

With a mixed contract (an agreement involving the supply of goods and services), Illinois looks at the contract’s “predominant purpose” to determine whether the 10-year or the compressed 4-year limitations period governs.

To apply the predominant purpose test, the court looks at the contract terms and the proportion of goods to services provided for under the contract. The court then decides whether the contract is mainly for goods with services being incidental or if its principally for services with goods being incidental.

Here, the Court noted the Agreement was a mixed bag: the defendant promised to provide both goods and services. But various parts of the contract made it clear that the defendant was hired to first provide a prototype product and later, to furnish components pursuant to plaintiff’s purchase orders. The court found that any services referenced in the agreement were purely tangential to the main thrust of the contract – defendant’s furnishing electronic sensors for plaintiff to attach to its client’s golf clubs. Support for this finding lay in the fact that the Agreement set out specific quantity and price terms for the goods (the components) but did not so specify for the referenced assembly, manufacturing and procurement services.

Other Agreement features that led to the court ruling the Agreement was one for goods included its warranty, sales tax, “F.O.B. and title passing provisions. The court noted that the warranty only applied to the manufactured products and not to any services and the contract’s sales tax provision – making Plaintiff responsible for sales taxes – typically applied in goods contracts, not services ones.

Additionally, the Agreement’s F.O.B. (“free on board”) and title passage terms both signaled this was a goods (not a services) deal. See 810 ILCS 5/2-106(1)(sale consists in passing title from seller to buyer for a price). [*5]

Since the plaintiff didn’t sue until more than five years elapsed from the breach date, the Court affirmed the dismissal of plaintiff’s breach of contract, breach of implied covenant of good faith and fair dealing and breach of warranty claims.

The Negligent Misrepresentation Claim

The Seventh Circuit also affirmed dismissal of plaintiff’s negligent misrepresentation claim. Under New York law (the contract had a NY choice-of-law provision), a plaintiff alleging negligent misrepresentation must establish (1) a special, privity-like relationship that imposes a duty on the defendant to impart accurate information to the plaintiff, (2) information that was in fact incorrect, and (3) plaintiff’s reasonable reliance on the information.

Like Illinois, New York applies the economic loss rule. This precludes a plaintiff from recovering economic losses under a tort theory. And since the plaintiff’s claimed negligent misrepresentation damages – money it lost based on the component defects – mirrored its breach of contract damages, the economic loss rule defeated plaintiff’s negligent misrepresentation count. [*10]

Afterwords:

The case presents a useful summary of the dispositive factors a court looks at when deciding whether a contract’s primary purpose is for goods or services. Besides looking at an agreement’s end product (or service), certain terms like F.O.B., title-shifting and sales tax provisions are strong indicators of contracts for the sale of goods.

The case also demonstrates the continuing viability of the economic loss rule. Where a plaintiff’s breach of contract damages are identical to its tort damages, the economic loss rule will likely foreclose a plaintiff’s tort claim.

Contract rights are assigned fairly often, especially in the mortgage loan and credit card contexts. In the former mortgage scenario, it’s common for a promissory note to be assigned multiple times during the note’s lifespan. When there’s eventually a note default, it becomes a challenge for the noteholder to trace how it came into the note’s possession. Repeated note assignments also provide the note maker (person who signed the note) a ready-made defense to a lawsuit based on the note. The noteholder plaintiff then has the burden of proving to the court that it has the right to sue on the note.

Because assignments are so prevalent and confusion often results as to who can enforce contract rights, it’s important from both plaintiff and defense sides to have a working knowledge of what claims can be assigned and what defenses are available to a a defendant sued by an assignee of a contract claim.

The basics: a person that has a claim against another has a “chose in action.” Classic examples of a chose in action include a claim for money owed on a debt, a right to stock shares or a claim for damages in tort. Black’s Law Dictionary 258 (8th ed. 2004)

Choses in action are generally assignable. An assignment transfers title to the chose in action to the assignee, who becomes the real party in interest. The assignee of the chose in action may then sue on the claim in his or her own name.

An action brought by an assignee is subject to any defense or set-off existing before notice of the assignment is given to the defendant. 735 ILCS 5/2–403(a). But the set-off or defense must relate specifically to the assigned claim. It can’t pertain to something extraneous to that claim.

Example, if Company X assigns its 2015 breach of contract claim against Person Y to me and I sue Person Y, Person Y can’t raise as a defense a $1,000 claim Person Y has against Company X from a 2013 contract. The two contracts are different and involve different underlying facts. Person Y can only defend based on the same 2015 contract Company X assigned.

Puritan Finance Corp. v. Bechstein Const. Corp. 2012 IL App(1st) 112261 illustrates what defenses a defendant has versus a contract claim assignee under the common law and under Article 9 of the UCC.

The plaintiff was the assignee of a bankrupt trucking company (the Assignor) that had previously done business with the defendant. The Assignor was owed monies by the defendant and assigned its claim to the plaintiff, a secured creditor of the Assignor.

After the plaintiff sued, the defendant asserted defenses based on an unrelated claim it had against the Assignor before the plaintiff’s involvement. The court granted judgment for the plaintiff after a bench trial for the full amount of its claim (about $22,000) and the defendant appealed.

Affirming the judgment for the assignee, the court first rejected the defendant’s set-off claim under Code Section 2-403(a). Since the defendant’s set-off involved a contract that was separate from the one being sued on, the defendant couldn’t use this separate contract as a defense to the assignee’s lawsuit.

The defendant’s Article 9 defense was a closer call. UCC Article 9 governs security interests in personal property as collateral to secure a debt. Section 9-404(a) of the UCC (810 ILCS 5/9-404) provides that an account debtor can assert against the assignee (1) any defense he (the debtor) had against the assignor “arising from the transaction” giving rise to the assignee’s claim; and (2) any other defense the debtor has against the assignor that accrues before the debtor received notice of the assignment.

Here, the defendant argued that under paragraph (2) of 9-404, it could assert defenses that related to a separate contract between it (the defendant) and the Assignor. The court disagreed and gave a narrow reading to Section 9-404.

It held that since the defendant didn’t and couldn’t yet file suit against the Assignor before the assignment of the contract to the assignee/plaintiff, the defendant’s claim hadn’t “accrued” within the meaning of Section 9-404. As a result, judgment for the plaintiff was affirmed.

Afterwords:

– Where a defendant is sued by an assignee of a contract claim, it will be difficult to challenge the claim unless the defendant has claims or defenses against the assignor that are transactionally related to the assigned claim. If the defendant’s defense relates to a separate, unrelated transaction, the defense or set-off will likely fail;

– Under Section 9-404, a defense “accrues” where the defendant actually has a viable cause of action against the assignor, such as where there has been a default in assignor’s payment obligations, instead of just a bare claim that a defendant is owed money on an unpaid invoice.

Occasionally, I’ll have a case that appears to be governed by two or more conflicting statutes of limitations. For example, one statute will give a plaintiff four years to file suit while an apparently equally applicable one compresses the time to sue to two years. As plaintiff, I usually (not always) argue for the longer limitations period to apply, while as defendant, I want the shortened time span (so I can move to dismiss the too-late complaint).

Plaintiff sued a car dealership and warranty service administrator for breach of various written agreements generated in connection with plaintiff’s purchase of a BMW. Plaintiff bought the car in 2005 and bought the service contract – which provided for repair and replacement of specified car parts – in 2009. Plaintiff alleged that in 2012 she noticed that the car had a defective engine bolt. When the defendants failed to provide warranty coverage for the bolt problem, plaintiff sued under state law breach of contract theories. Defendants’ filed separate Rule 12(b)(6) motions to dismiss plaintiff’s complaint. The court granted the motion and dismissed all counts of plaintiff’s complaint with prejudice.

Q: Why?

A: Plaintiff’s breach of contract claims against the dealership failed for two reasons: (1) the claims were time-barred; and (2) plaintiff failed to allege which part of the sales contract the dealer breached. The court held that the four-year limitations period set forth in Uniform Commercial Code (“UCC”) Section 2-725 (810 ILCS 5/2-725) governed the plaintiff’s sales contract count.

The UCC applies to “sales” transactions involving “goods” and Section 2-725 simply provides that “an action for breach of any contract for sale must be commenced within 4 years after the cause of action accrued“. Belsky, *3, 810 ILCS 5/2-725(1). There is also no “discovery rule”: the four year time limit applies regardless of whether the plaintiff lacked knowledge of the breach. 810 ILCS 5/2-725(2).

Plaintiff argued that Illinois’ ten-year limitation period for written contract applied. See 735 ILCS 5/13-206. But the Court sided with defendants and applied the shorter four-year limitations period. It held that the BMW, a car, clearly met the UCC’s definition of “goods” (a “thing” that was “moveable” at contract inception) and involved a “sale” (passing of title from seller to buyer for a price). *3 (UCC Section 2-105(1)(goods definition); UCC Section 2-106(1)(sale def.).

In addition, Code Section 13-206 (the ten-year statute for written contracts) expressly exempts claims under UCC Section 2-725 (the four-year rule) from its scope. Section 13-206’s lead-in provides “except as provided in Section 2-725 of the Uniform Commercial Code…”. Applying the four-year limitation, the Court held that the plaintiff’s breach of contract claims were three years too late and dismissed the case. *3.

In dismissing the plaintiff’s service contract claims, the Court relied on agency law. It held that the dealer entered into the contract on behalf of a disclosed principal (the warranty administrator). Black letter agency rules dictate that an agent (here, the dealer) of a disclosed principal (the administrator) isn’t liable on contracts entered into for its principal. *7. The Court also dismissed the plaintiff’s service contract claim against the administrator because like the sales contract, the service contract also specifically excluded engine bolt defects from its coverage. *9-10.

Take-aways: Where two conflicting limitations periods potentially control, the one that more specifically matches the facts will govern. A contract for the sale of a “good” (like a car) will trigger the UCC’s four-year time span rather than the ten-year rule for written contracts.

Also, a contractual disclaimer, if easy to read and find, will be upheld.